Aiming higher at Five Below

By Jane M. Von Bergen, Inquirer Staff Writer

At Five Below's busy store in the Gallery in Center City, a grad student stocked up on items for her apartment in Camden - a $2 spatula and a $5 daisy-shaped scarf holder topped her pile of purchases.

It's back-to-school season, and the discount teen-oriented store was loaded with $5 backpacks in purple, pink, and glitter, Hello Kitty pencil cases and notebooks in every hue.

A year ago, on July 19, 2012, the Philadelphia-based company, founded by the creator of Encore Books and Zany Brainy, held a different kind of sale - an initial public offering, selling 11.06 million shares at $17 apiece.

In June, Five Below executed a secondary offering on its stock, with 6.9 million shares on the market at $36 a share.

Five Below cofounders David Schlessinger and Tom Vellios each sold about a third of their holdings as part of the secondary offering. Shares closed at $37.35 on Friday, up 12 cents.

Despite the doubling of share price, most of the 14 analysts who cover Five Below rate it as neutral.

Jeremy Hamblin, a senior consumer research analyst with Dougherty & Co., a Minneapolis-based brokerage, understands why his colleagues might feel that way, although he disagrees, rating it a buy.

"The stock is an expensive stock," he said, on the high side based on a ratio of share price to earnings.

But he looks at different numbers: Initial results from new stores and same-store sales - a retail statistic that compares results in stores open for at least a year. Both are up.

"We believe the earnings power for this, long term, is tremendous," he said.

Same-store sales were up 4.2 percent for the first quarter, the 28th consecutive quarter of increases.

"This time frame spans both good and lean economic times and our performance through it all speaks to the strength and resilience of Five Below," Vellios, the CEO, said in the June earnings call.

Vellios, a former Caldor Inc. executive, came to Five Below from Zany Brainy. Schlessinger, who grew up in the area, made a name for himself when, as a college student, he used his bar mitzvah money to start Encore Books.

Selling Encore, he created Zany Brainy, an upscale toy store, in 1991, hiring Vellios in 1995.

Zany Brainy filed for bankruptcy in 2001 - done in by a failed Internet investment, and perhaps by overly aggressive expansion. Zany had purchased a rival and added many new stores.

Is Five Below on the same track? By January, Five Below operated 258 stores. Now there are 283. Earlier this month, it launched four stores in Texas, part of 60 planned for 2013.

Hamblin isn't worried. He believes that Five Below has the same drawing power as the popular chains Dollar General and Family Dollar.

"This is more like a teen dollar store," he said. No item costs more than $5.

These days, the company is hunting for a president to replace chief operating officer David Johnston, recruited from Wawa Inc., who will leave at the end of the month.